The Million Dollar Comma

Brandy 120X180The Million Dollar Comma

By: Brandy E. Natalzia

With the advent of legal service websites like Legal Zoom, Rocket Lawyer,, etc., almost anyone can draft a will, a durable power of attorney, or a real estate contract.  People can even set up a limited liability company and draft their own divorce documents.  The advent of “cost effective” online legal services should be signaling the demise of the brick and mortar, flesh and blood attorney, right?

We’ve all heard the old adages:  “Pay now or pay later” and “Just enough information to be dangerous.”  That has never been more applicable than with the proliferation of self-help legal websites.  These websites offer form banks for standard documents and general legal and/or statutory guidelines.  But there are times when that may not be enough.  Have you ever heard of the “Million Dollar Comma”?  Often touted as rumor or some sort of urban legend, it is anything but.

One part of the U.S. Tariff Act of June 6, 1872 contained a sentence that intended to exempt the importation of semi-tropical and tropical fruit plants from tariffs. The sentence was meant to read “Fruit plants, tropical and semi-tropical for the purpose of propagation or cultivation.” One comma, however, was mysteriously moved one word to the left during the copying process, thereby rendering the sentence as: “Fruit, plants tropical and semi-tropical for the purpose of propagation or cultivation.”

Importers of oranges and lemons and the like were quick to seize upon the misplacement and use it to their advantage. They contended that under the wording of the act, all tropical and semi-tropical fruit were exempt and thus could be brought into the U.S. without payment of the tariffs.

The Treasury initially ruled against this interpretation, but then later reversed itself and sided with the fruit importers. Most of the monies collected as duty on the import of tropical and semi-tropical fruit while the errant comma was in effect were refunded to those who had paid the fee.  That memorable punctuation error deprived the U.S. government of an estimated $1 million in revenues.

Of course, most of us aren’t dealing with something on the scale of the above example and that really isn’t a case of not having adequate legal representation; however, similar consequences are well within the realm of possibility for anyone.  Imagine, for example, that you have a modest estate and you love all three of your children equally.  Your spouse predeceased you and you would like to update your will to reflect your current situation.  So, you go online with the best intentions to draft a simple will that divides your estate equally among your three children.  You draft your will to leave your entire estate “to Child A, Child B and Child C, in equal shares.”  Despite your intentions, what you have now done constructively is to give Child A half of your estate while Child B and Child C will be left to divide the other half.  The proper drafting to achieve your desired result would have been to leave your entire estate “to Child A, Child B, and Child C, in equal shares.”  Thus, each child would thereby receive 33 1/3% of your estate. While this simple punctuation mistake may be overlooked by many, this missing comma could provide an heir with the legal grounds to contest the will.  What was intended to be a simple will could potentially result in a contentious and costly court battle.

Legal websites will tell you that drafting basic legal documents rarely involves complicated legal rules and most people do not need a lawyer’s help to draft those types of documents.  While that may be true, it’s not always the “complicated legal rules” that you need to look out for.  Sometimes it just may be worth it to pay a professional for that added peace of mind.


Trust – Probate

By: Timothy P. Brynteson


Estate planning attorneys are frequently asked by clients to explain the difference between a “will” and a “trust.”  This is normally in the context of planning for the disposition of assets upon the client’s death – so we surmise that clients are looking for information regarding the differences between and the benefits of both Wills and Living Trusts as testamentary instruments.   Many times, our clients will have the general impression that Living Trusts are “better” than Wills and have a notion that they may save taxes, may protect assets in some way, insure privacy and avoid probate, but they aren’t sure and want to understand how they work; and frequently, what we think of them.

Let me state at the outset that my bias is, more often than not, to guide our clients towards a Will as the basic testamentary instrument.   While Living Trusts certainly have their place, we don’t favor them as the default testamentary vehicle for reasons we will explain below.   However, we have drafted many Living Trusts and believe they are the most appropriate instrument in certain circumstances.  Of course, if a client really wants to work with a Living Trust as their preferred document, we will be happy to work with them.  After all, there isn’t a “right” or “wrong” way to make these plans.   Either document can help a client achieve most common estate planning objectives.  The rest of this article will briefly describe probate and wills, and some of the benefits of Living Trusts, along with some of the perils – as opposed to Wills.  Second, it will describe the situations in which Living Trusts may be preferable to a Will.

Probate and Wills

Before we discuss Revocable Living Trusts, it will be important to understand the probate process in our legal system and its role in property transfers.  When a person dies owning property, particularly “real property” (real estate) or titled property (automobiles, trailers, bank and investment accounts) – and the property is intended to be given to heirs or other devisees – how can this be done if the owner is dead?  The answer is through the probate process in most states.  “Probate” comes from the latin verb “probare” which means to “prove, try, test or examine.”   It is basically the process of submitting a will to the court for “testing” and distributing the assets as provided in the will of the deceased.  In Colorado, Personal Representative, named in the Will, is appointed as the responsible party by the Court.  This appointment grants the Personal Representative the authority to pay bills, settle accounts and distribute any property.  The process in Colorado (and most states) is fairly simple, inexpensive and un-intrusive.  Unless there are conflicts, the Court is not involved and the Personal Representative can handle most of the work, paying bills and distributing property according to the plan detailed in the Will.  However, for various reasons, some people would still like to avoid the probate process.  One way to do avoid the probate process is by establishing, and importantly, fully funding, a Living Trust.

Revocable Living Trusts

Essentially, a Revocable Living Trust is an entity into which one places all, or most, of one’s assets.  As the name implies, the trust can be amended or fully revoked at any time as long as you are alive.  The trust document, or “agreement” will normally give the grantor full control over all the assets and income in the trust.  In other words, your control over the assets doesn’t change, they are simply “owned” by the trust rather than you as an individual.  Ownership by the trust rather than the individual is what gives rise to both the benefits and potential problems of a Living Trust.

Because your assets are owned by the Trust rather than by you as an individual, the Trust doesn’t “die” when you do.  Therefore, when you pass away, your successor trustee (named in the Trust Agreement) simply takes over managing your assets and/or distributing them as you direct in the Trust Agreement.  In this way, the Living Trust avoid probate – there is no Will to “prove” and follow.   A related benefit is that even if you don’t die, but if you either cannot, or will not, manage your financial affairs, your successor trustee (hopefully someone you trust) can step in and manage your affairs i.e. pay bills, manage property and investments and otherwise contract on your behalf.

These benefits are only available if all of your assets are actually in the name of the trust.  This is the area where, in our experience, people may lose the potential benefits of a Living Trust.  Over  time, it is difficult to remember to have all your assets place in the name of the trust.  Bank accounts, real estate, investment accounts, life insurance, retirement accounts . . . all need to be owned by the Trust.  Sometimes, this just isn’t done at the beginning, or even if it is, over time, assets are bought and sold and habit takes over . . . people tend to forget to put them in the name of the trust.  If there are assets titled outside the Trust, at death, it may be necessary to open probate to handle those assets, thus defeating some of the benefits of a Trust.  In addition to requiring a bit more effort manage, Living Trusts typically cost more at the outset to set up than a Will which accomplish the same goals for the client.

Benefits of a Trust

Despite some of the burdens of preparing and administering a trust, there are two significant benefits to a Living Trust.  The first is for people who own real property titled in a different state.  Owning that property in a Living Trust rather than individually will allow that property to be distributed or managed after death without requiring opening a probate case in that state.  As stated earlier, the Trust does not “die” and so whomever is successor trustee may simply sell or otherwise manage the property without Court approval through the probate process in that state.

The second benefit is for individuals who are concerned about the management of their assets when they either lose capacity or interest.  While a Durable Power of Attorney can provide a trusted individual the necessary authority to manage one’s financial affairs, a Successor Trustee taking over under a trust agreement can be a simpler and smoother process.


Both Wills and Living Trusts can be effective documents for passing assets to heirs and devisees and both may be used to avoid or minimize estate taxes if properly drafted.  Living Trusts may provide the benefit of simpler management of assets by a third party (a successor trustee) during your incapacity than is sometimes available under only a Power of Attorney; and Living Trusts can help you avoid probate in a different state if you own property there.  Living Trusts will typically cost more to draft at the beginning and transfer your assets into the trust and can be more cumbersome to manage during your life.   Both documents (along with a power of attorney) are effective tools for clients and attorneys in planning for a client’s death and/or disability – it will be up to you and your counsel to decide on the right approach for your circumstances.

The Business Judgment Rule: The First Line of Defense

As the economy plunged and debtors looked for ways to avoid paying their obligations to lenders across the country, the courts saw an explosion of cases alleging breach of fiduciary duty, breach of the duty of good faith and fair dealing, and other “mismanagement” by directors, officers, and/or managers of financial institutions and other entities. A growing number of such claims by shareholders and others affected by the closure of a financial institution are also being filed. So what is a director, officer, or manager to do when faced with such claims? Often, the legal doctrine known as the Business Judgment Rule can provide the best, most effective, and first line of defense.

The Business Judgment Rule is a legal presumption that provides that so long as a director or officer of a company is disinterested, has acted on an informed basis, in good faith, and with an honest belief that the action taken was in the best interests of the company, the decisions made are not subject to challenge. In adopting the Business Judgment Rule, the Colorado Supreme Court described it as follows: the “business judgment doctrine bars judicial inquiry into the actions of [a manager] taken in good faith and in the exercise of honest judgment in furtherance of a lawful and legitimate corporate purpose.” Hirsch v. Jones Intercable, Inc., 984 P.2d 629 (Colo. 1999). When the Business Judgment Rule applies, decisions and actions of disinterested directors and officers will not be disturbed or questioned by a court if they can be attributed to “any rational business purpose.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). The rule is meant to preclude a court from imposing its own judgment on the business and affairs of a company.

In order to demonstrate that the Business Judgment Rule applies, an officer, director, or manager must generally show three things. First, it must be shown that the officer, director, or manager is independent or disinterested. This typically involves a review of the financial interests of the officer, director, or manager whose actions are being challenged to show she did not have a financial interest in the underlying transaction. Second, it must be shown that the decision being challenged was made in good faith. This usually involves a simple showing that there was a reason for the decision or action and what the stated motivation for the decision or action was. Third, it must be shown that the decision or action was “informed” or exercised with “due care.” This typically requires some evidence that there was a reasonable effort to ascertain and consider all relevant information prior to the decision being made or action being taken.

It is important to keep in mind that the Business Judgment Rule does not apply where a director, officer, or manager being sued is shown to have an interest, usually a financial stake of some sort, in the transaction in dispute. A director, officer, or manager is not “disinterested” if they either stand on both sides of a transaction or expect to derive a personal financial benefit from it. In other words, if the director, officer, or manager is engaged in self-dealing, she cannot claim the benefit of the Business Judgment Rule as a defense to claims of mismanagement. However, self-interest alone is not sufficient to disqualify an officer, director, or manager from using the Business Judgment Rule as a defense. Merely alleging complete dominion or control over business decisions is also not enough to defeat the Business Judgment Rule. There must be evidence that there was disloyalty to the organization, and that the benefit received was material or significant, rather than minimal. Thus, where it is shown by some tangible evidence that a director, officer, or manager either received or could have received a direct and substantial benefit from the transaction, the Business Judgment Rule will not be available as a defense.

Under the Business Judgment Rule, the mere fact that, in hindsight, an officer, director, manager, or management group made a bad decision or a mistake is not sufficient to challenge that decision or allege breach of fiduciary duty or other mismanagement claims. Courts acknowledge that, while shareholders might disagree with a management decision, and while it may be apparent in hindsight that the decision was wrong, the decision can withstand an attack because it was made in good faith by disinterested persons. In the absence of fraud or bad faith, the Business Judgment Rule thus often provides a complete defense to rising claims of breach of fiduciary or other obligations being levied against directors, officers, and managers.


This article was published in the September/October 2011 edition of The Independent Report, the official newsletter of the Independent Bankers of Colorado and the June 2012 edition of the Colorado Bar Association Business Law Section Newsletter.

Charging Orders and the LLC: How to Reach the Assets Hidden by a Judgment Debtor in a Limited Liability Company

Often the hard work of collecting money you are owed starts after a judgment is entered. Wise collection strategies are crucial in the current real estate market where it may no longer be a practical option to record a transcript of the judgment (thus obtaining a judgment lien), wait for the judgment-debtor’s property to be refinanced or sold, and collect from the equity. Today, the creditor who pushes the hardest and uses all available legal tools often is the first and only one who gets paid. So … what is a creditor to do when a judgment debtor has hidden all of his assets in a limited liability company? Charge!

How do I get to the debtor’s interest in the company? Use a charging order.

A common chant at sporting events, “Charge!” has become the mantra of lawyers advising creditor clients trying to collect a debt from an individual who holds limited liability company (LLC) interests.

A charging order is a court order directing the charged LLC to pay all assets or distributions of the LLC due to the judgment debtor to the creditor instead. Colorado Revised Statute §7-80-703 authorizes any creditor to obtain a charging order “on application.” In 1997 when this section was first added, the statute said “upon due application”, which was interpreted by the courts to require prior notice to anyone affected by the charging order. See First Nat’l Bank of Denver v. District Court, 652 P.2d 613 (Colo. 1982). In 1998, this provision was amended to simply say “on application,” leaving open the question of whether prior notice is still required. The charging order is effective upon service to the LLC and then creates a lien on the debtor’s membership interest. Here, service means personal service pursuant to Colorado Rule of Civil Procedure 4. Such service can be accomplished several ways: by personal delivery to the LLC’s registered agent or an officer or member of the LLC, or even to a direct secretary or assistant of the registered agent, officer or member. See In re Goodman Associates, LLC v. WP Mountain Properties, LLC, 222 P.3d 310 (Colo. 2010). Service by certified mail may also suffice if the registered agent cannot easily be found; however, if serving in this manner, one should obtain a court order approving such service and setting the date of service as five days from the date of mailing. See § 7-90-704(2), C.R.S.

A creditor with a charging order may seek appointment of a receiver to oversee the profits or other money due or to become due to the judgment-debtor member. An appointed receiver can ensure that a creditor can easily and without further court orders access information such as the financial records of the LLC. Additionally, the charged membership interest can be foreclosed, or ordered sold by the court, and the proceeds paid to the charging creditor. The statute also authorizes the sale of the charged membership interest by consent of all other members. Neither scenario triggers mandatory dissolution.

Historically, if the debtor’s membership interest was not sold, the charging creditor could not step into the shoes of the judgment debtor, but instead assumed the role of an assignee or transferee of the membership interest, meaning that the creditor could not control the LLC even if the charged membership interest was the majority interest or the judgment debtor was the manager of the LLC. Absent consent, even if the only other interest remaining in the LLC was infinitesimal, the creditor had no management or governance rights in the LLC, but only a right to payment of monies owed by the LLC to the judgment debtor. See In re Albright, 291 B.R. 538 (Bankr.D.Colo. 2003), citing § 7-80-702, C.R.S.

However, in 1998, language was added to the charging order statutes allowing a court to “make all other orders, directions, accounts and inquiries that the debtor member might have made or that the circumstances of the case may require.” While there are not yet any Colorado cases interpreting this change, it appears that there may be more flexibility for courts to order additional relief to the creditor as part of the charging order, including providing for additional or greater rights than historically allowed if the circumstances justify it. One example of such flexibility has recently arisen in the context of single-member LLCs. In a single-member LLC, the purpose and benefit of the charging order, derived from the Uniform Partnership Law and intended to benefit the non-debtor partners, is not applicable. The charging order is intended to avoid forcing partners of a judgment debtor becoming business partners with, or to involuntarily share governance of their business with, a creditor. Single-member LLCs need no such protection. Additionally, in a single-member LLC the effect of a charging order would be to leave the LLC without any disinterested person to manage it. As such, courts now appear willing simply to order a judgment debtor holding an interest in a single-member LLC to forfeit or assign the interest in the LLC to the creditor, rather than requiring foreclosure of the interest. See Olmstead v. Federal Trade Commission, 44 So.3d 76 (Fla. 2010) (court could order debtor to surrender all right, title and interest in debtor’s single-member LLC to satisfy an outstanding judgment). Since the management aspect is the same in multi-member LLCs where the judgment debtor is the only manager, the courts may also, given the flexibility in the current statute, provide such relief for multi-member LLCs.

The use of a charging order in the context of LLC interests is not yet well guided by case law. Consequently, courts look to the Uniform Partnership Law for guidance on issues such as priority of competing charging orders and the availability of other means to collect a judgment by going after the judgment debtor’s interest in an entity.

So what happens if more than one creditor serves a charging order?

With competing charging orders, he who serves first is prior. See Union Colony Bank v. United Bank of Greeley NA, 832 P.2d 1112 (Colo.App. 1992). The priority of charging orders is determined by the date of service of the order upon the LLC, and not by the date judgment was obtained or a transcript of judgment was recorded. Being the first to obtain and serve a charging order is critical in achieving the first and prior lien against the judgment debtor’s membership interest.

Is a charging order my only option?

The principal difference between the LLC and partnership statutes is that the Uniform Partnership Law specifies that the charging order is the only remedy available to a creditor to enforce the judgment against a partner’s interest. See § 7-64-504(5), C.R.S. The LLC statutes do not contain such a provision. Some creditors thus argue that a charging order is not the exclusive remedy available when pursuing a judgment-debtor’s LLC interest. Although Colorado courts have not yet opined about whether a charging order is the exclusive remedy for reaching a judgment debtor’s LLC interests, recent decisions from other states indicate that it is not . See Olmstead, supra; see also F.T.C. v. Peoples First Credit, LLC, 621 F.3d 1327 (11th Cir. 2010). A recent decision by the Colorado Bankruptcy Court and an early Colorado Supreme Court decision both indicate Colorado would follow these other states. See In re Albright, supra (noting the charging order statute serves no purpose in a single-member LLC) and Collard v. Hohnster, 174 P. 396 (Colo. 1918) (remedy provided by one statute does not abolish another or common law unless specifically provided).

So what other options do I have?

With the rising use of LLCs in Colorado, the ability to collect a judgment through LLC assets can mean the difference between getting paid or not. Often the charging order is the best option for pursuing collection against a judgment debtor hiding assets in an LLC. Unlike a garnishment, which expires 180 days after service and after which a competing creditor could step in front of you, charging orders do not expire and attach to all distributions or assets due or that become due to the judgment debtor until the judgment is satisfied. However, charging orders can be avoided if an LLC doesn’t make distributions. They are also often misunderstood by LLC managers, and achieving compliance can be difficult without cooperating non-debtor members or managers. Thus, garnishments can also be an effective tool when used in conjunction with the charging order.

A creditor can also foreclose the interest, but this can be tricky, time-consuming, and expensive. Colorado law is not clear about how to foreclose an LLC membership interest, what effect the foreclosure has on the LLC, and whether the foreclosing creditor can then demand dissolution and liquidation of the LLC from which the judgment might be satisfied.

In pursuing collection of judgments against debtors with assets tied up in LLCs, a charging order can be a powerful and useful tool. It is important to be sure your charging order contains sufficiently comprehensive enforcement mechanisms and provisions allowing a creditor to obtain information about the financial status of the LLC, however, to obtain the maximum benefit. Using the charging order in conjunction with other available collection remedies will greatly increase the likelihood of recovery. If you are interested in pursuing a charging order, or have received on and have questions about it, contact Jennifer Lynn Peters, Esq. 970-330-6700.